Have You Seen…?

Editors' note: The editors would like to thank John T. Reisch, East Carolina University for his years of service to "Have you Seen…?" John's term as a contributor ended as of the Fall 2004 issue. We welcome and thank Sudip Bhattacharjee, Virginia Tech; and Evelyn Patterson, SUNY-Buffalo as new contributors.

"Electronic versus Face-to-Face Review: The Effects of Alternative Forms of Review on Auditors' Performance," by J. Brazel, C. Agloglia, and R. Hatfield, The Accounting Review (Volume 79, Issue 4, 2004): 949-966.

This study examines the effects on audit workpaper preparers of using two different methods of review: face-to-face and electronic review. The study also compares both review groups to a control group that did not anticipate a review. The authors find that preparers anticipating a face-to-face review felt more accountable, were more concerned with audit effectiveness, produced higher quality judgments, were less efficient at their task, and were less likely to be inappropriately influenced by prior year workpapers than preparers in both the electronic review and no-review conditions. Interestingly, electronic review preparers generally did not differ from the no-review group. This may suggest that it is how a review is to be conducted, and not merely the expectation that a review will occur, that affects the decision maker's judgments and perceptions.

"Audit Anticipation: Does it Impact Job Performance?," by A. A. Neidermeyer and P. E. Neidermeyer, Managerial Auditing Journal (Volume 20, Number 1, 2005): 19-29.

This study conducted an experiment with 90 students as participants to investigate if anticipation of an audit affects performance in an accounting task. The results indicate that participants made fewer errors in preparing vouchers when an audit was anticipated, based on information about the scope of the audit conveyed by management. Future research could attempt to replicate these findings with internal auditors or accounting personnel.

"Gaps in Guidelines on Audit Committees," R. G. Walker, Abacus (Volume 40, Issue 2, 2004): 157-192.

This study traces the history of audit committee responsibilities, beginning with negotiating with auditors and reviewing financial statements in the 1940s, and evolving to oversight of internal management in the 1970s. The author argues that gaps continue to exist in the contemporary guidelines given to audit committees, including the audit committee charters of Australia's top 200 listed companies, and proposes a model charter that may contribute to improvements in audit committee effectiveness.

"The Effects of Alternative Justification Memos on The Judgments of Audit Reviewees and Reviewers," by C. P. Agoglia, T. Kida, D. M. Hanno, Journal of Accounting Research (Volume 41, No. 1, 2003): 33-46.

Prior research has shown that requiring justification of judgments can result in differences between auditors required and auditors not required to justify their judgments. In this study, the authors examine the impact of using three different justification memos: supporting, balanced, and component memos. Using a comprehensive control environment case based upon an actual client that experienced fraud, they find that the justification memo utilized can affect the judgments of auditors preparing the memos, as well as the judgments of auditors who review their work. Specifically, the results indicate that auditors using the component memo thought that the firm's control environment was more likely to prevent fraud as compared to the supporting and balanced memo groups.

"Auditor Detected Misstatements and the Effect of Information Technology," by W. Messier, A. Eilifsen and L. Austen, International Journal of Auditing (Volume 8, 2004): 223-235.

Given the increase in the use of information technology (IT) by audit clients, the authors investigate (1) whether IT affects the procedures auditors use to detect misstatements and (2) whether the causes of detected misstatements differ on the basis of whether the client's information system is computerized. A questionnaire was sent to the six largest accounting firms in Norway. Relative to studies completed in the late 1980s, the results suggest that auditors have increased the use of tests of details relative to attention directing procedures. In addition, the major causes of misstatements tended to be the result of IT-related internal control problems and training and workload issues regarding accounting personnel. This was especially true for business processes that were computerized relative to those that were not.

"Benchmarking Audit Committee Effectiveness in Financial Reporting," by J. Song and B. Windram, International Journal of Auditing (Volume 8, 2004): 195-205.

The authors examine a sample of UK companies that were subject to adverse rulings by the Financial Reporting Review Panel to test the impact of board and audit committee characteristics on the probability of compliance with reporting standards. The results suggest that board independence promotes audit committee effectiveness and that director financial literacy may assist as well. Surprisingly, the results suggest that multiple directorships may have a positive impact on audit committee effectiveness.

"Internal Auditors and Job Stress," by L. Larson, Managerial Auditing Journal (Volume 9, 2004): 1119-1130.

A survey was used to gather data from a sample of internal auditors in the United States to study the issue of job stress. Respondents indicated that organizational job stressors in their work environment were more a source of stress than were individual job factors. Specifically, respondents reported that they would like to be paid more and to have greater input into the decision-making processes relating to their jobs. Company politics and lack of training and development opportunities were other major sources of stress.

"Mail Survey Reliability Through Follow-up Mailings: The Case of Auditor Changes," by K. Dunn and H. F. Huss, Managerial Auditing Journal (Volume 9, 2004): 1048-1054.

The authors address two problems with mail surveys response rates and unreliable information. The analysis presented examines the effects of increased pressure to respond to mail surveys on the reliability of survey responses. The findings suggest that increased pressure to respond decreased the reliability of the information obtained. In addition, personalization of the survey increased the reliability of responses. The type of auditor change was a significant determinate of response reliability, but companies with greater financial distress were no more likely to give unreliable responses concerning the independent auditor changes.

"Are Big Four Audits in ASEAN Countries of Higher Quality than Non-Big Four Audits?" by I. Khurana and K. Raman, Asia-Pacific Journal of Accounting and Economics (Volume 11, No. 2, 2004).

The authors investigate whether reputation concerns cause Big 4 auditors to provide higher quality audits than non-Big Four firms in ASEAN (Association of South East Asian Nations) countries where litigation exposure is low or nonexistent. The study uses quality of reported earnings (earnings conservatism) as a proxy for audit quality. The results suggest that for the period examined (1990–1996), Big 4 audit firms did not provide higher quality audits than did non-Big 4 audit firms in these countries.

"Audit Pricing Following Mergers of Accounting Practices: Evidence from Hong Kong," by M. Firth and T. Lau, Accounting & Business Research, (Volume 34, 2004): 201-214.

The authors test for changes in audit pricing for two mergers of auditing firms. The results suggest that a 1997 merger of local firm Kwan Wong Tan & Fong (KWTF) with international firm Deloitte Touche & Tohmatsu (DTT) was followed by an increase in audit fees charged to incumbent KWTF clients. In contrast, a merger of Coopers & Lybrand (CL) and Price Waterhouse (PW) did not result in any significant change in audit fees. A pre-merger fee premium that PW enjoyed over CL persisted after the merger. The authors theorize that the clients of CL were unwilling to pay higher fees after the merger or that the merger created audit efficiencies that were passed on to the clients.

"Impact of the Timing of Receipt of an Inherited Explanation on Auditors' Analytical Procedures Judgments," by W. Green, Accounting & Finance, (Volume 44, 2004): 369-392.

The author examines whether the timing of receipt of an inherited explanation (before or after self-generating explanations) affects auditors' hypothesis generation. The results suggest that, consistent with a facilitation effect, more non-error explanations are generated by auditors initially inheriting a non-error explanation. In addition, consistent with a recency effect, the initial likelihood assessed for the inherited explanation was higher when it was received after self-generation of alternatives. Despite these initial differences, the timing of the inherited explanation did not significantly affect the auditors' information search, evaluation processes or outcome performance (in terms of cause selection). The results suggest that, although inheriting an explanation from management does affect the outcome of the AP process, it does not result in fewer correct outcomes.

"The Effectiveness of Alternative Risk Assessment and Program Planning Tools in a Fraud Setting," S. K. Asare and A. M. Wright. Contemporary Accounting Research (Volume 21, Issue 2, 2004): 325-350.

The authors investigated the impact of alternative risk assessment (standard risk checklist versus no checklist) and program development (standard program versus no program) tools on fraud planning effectiveness. Using an SEC enforcement fraud case, the study found that auditors who used a standard risk checklist made lower risk assessments than those without a checklist. Also, auditors with a standard audit program designed a relatively less effective fraud program than those without this tool, and were less willing to seek consultation with fraud experts. In addition, fraud risk assessment was not associated with the planning of more effective fraud procedures, but was directly associated with the desire to consult with fraud specialists.

"The Impact of the Type of Accounting Standards on Preparers' Judgments," by J. Psaros and K. T. Trotman, Abacus (Volume 40, Issue 1, 2004): 76-93.

Based on two laboratory experiments, the authors examined financial statement preparers' consolidation judgments and how they are impacted by the precision of accounting standards (substance-over-form versus rules-based). The results show that, when participants used a substance-over-form accounting standard, they justified their consolidation judgments on case-specific information rather than on different interpretations of the phrase 'capacity to control.' When participants used a rules-based standard, incentives were found to impact accountants' consolidation judgments, resulting in more aggressive judgments.

"The Influence of a Business-Process Focus on Category Knowledge and Internal Control Evaluation," by L. S. Kopp, and E. O'Donnell, Accounting, Organizations and Society (Forthcoming 2005).

The authors examine whether organizing information about internal controls around business processes instead of control objectives produces stronger category knowledge during training and improves decision performance during internal control evaluation. Novices who were trained to evaluate internal controls using business-process-focused materials developed stronger category knowledge. After training, novices who evaluated internal controls using materials organized around a process focus identified more control issues. Findings suggest that the process focus may be a more effective framework for organizing internal control evaluation.

"The Effects of Feedback Type on Auditor Judgment Performance for Configural and Non-Configural Tasks," by P. W. Leung and K. T. Trotman, Accounting, Organizations and Society (Forthcoming 2005).

The authors examine the effect of four different types of feedback (outcome, task properties, cognitive, combined task properties/cognitive) on risk assessment judgments for tasks requiring or not requiring configural cue processing. Results indicate that task properties feedback and combined feedback improved performance on both tasks. Outcome feedback was more effective for the non-configural task, while cognitive feedback was more effective for the configural task. In addition, combined feedback was particularly effective in transferring knowledge across tasks.

"Testing the 'Inverted-U' Phenomenon in Moral Development on Recently Promoted Senior Managers and Partners," R. A. Bernardi and D. F. Arnold Sr., Contemporary Accounting Research (Volume 21, Issue 2, 2004): 353-366.

The authors examine the change in the average level of moral development over a 7.5-year period of promotion, attrition, and survival in five Big 6 firms. They found that the firms retained auditors with higher average levels of moral development (measured using the Defining Issues Test), while those with lower levels left the firms. The average level of moral development for new partners was at least as high as the group from which they came. This suggests that the concern about Big 6 firms retaining a higher proportion of auditors with lower moral development may be an artifact of prior studies' research designs.

"Audit Firm Industry Specialization and Client Disclosure Quality," by K. A. Dunn and B. W. Mayhew, Review of Accounting Studies (Volume 9, No. 1, March 2003): 35-58.

The authors study whether or not auditor selection is a part of firms' overall disclosure strategy. The authors find evidence that there is a positive association between industry-specialist audit firms and analysts' rankings of disclosure quality in unregulated industries, but not in regulated industries. These results suggest that firms that hire auditors that are industry-specialists provide enhanced financial disclosures and that the choice of an industry-specialist auditor signals a client's intention to provide enhanced disclosures. However, industry-specialist audit firms are less important in regulated industries.

"Audit Firm Portfolio Management Decisions," by K. M. Johnstone and J. C. Bedard, Journal of Accounting Research (Volume 42, Issue 4, 2004): 659-690.

The authors study how auditors manage their client portfolio by utilizing client acceptance and continuance decisions of a single large audit firm. The evidence shows that the firm is removing the riskier clients from its portfolio and that the firm's newly accepted clients are less risky than its continuing clients. The greatest reduction in portfolio risk arises from the discontinued clients. The results also suggest that audit risk factors are more important in the audit firm's portfolio management decisions than are financial risk factors, while audit pricing is not a factor in these decisions when the authors control for risk and other client characteristics.

"Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market," by S. A. Mansi, W. F. Maxwell and D. P. Miller, Journal of Accounting Research (Volume 42, Issue 4, 2004): 755-793.

This paper considers the relation between auditor quality and tenure and the cost of debt financing. The results show that auditor quality and tenure are negatively and significantly related to the cost of debt financing and that the relation between auditor characteristics and the cost of debt is most pronounced in firms with debt that is non-investment grade. The results suggest that the insurance and information role of audits are economically significant to the cost of debt and that auditor quality and tenure matter to capital market participants.

"Auditor Independence, Non-Audit Services, and Restatements: Was the U.S. Government Right?," by W. R. Kinney , Z. V. Palmrose, and S. Scholz, Journal of Accounting Research (Volume 42, Issue 3, 2004): 561-588.

This study addresses the presumed negative effect that non-audit service fees have on the quality of financial reporting. Assuming that restatements of previously issued financial statements are attributable to low-quality financial reporting, this paper examines the fees paid by restating registrants and for similar non-restating registrants. The results show that fees for financial information systems design and implementation or internal audit services are not associated with restatements, but that there is a positive association between fees from unspecified non-audit services and restatements. Moreover, the results show a negative association between tax service fees and restatements, consistent with net benefits from acquiring tax services from a registrant's audit firm. The significance of these results is primarily caused by larger registrants.

"Fees Paid to Audit Firms, Accrual Choices, and Corporate Governance," by D. F. Larcker and S. A. Richardson, Journal of Accounting Research (Volume 42, Issue 3, 2004): 625-658.

This paper examines the relation between the fees paid to auditors for audit and non-audit services, and the choice of accrual measures for a large sample of firms. Overall, the results show that, as the ratio of non-audit to audit fees increases, the total absolute value of accruals increases. However, other tests suggest that this only occurs for about 8.5 percent of the sample. The results also show that there is a negative relation between the level of fees (both audit and non-audit) paid to auditors and accruals, with further tests suggesting that this negative relation is strongest for client firms with weak governance.

"Nonaudit Services and Earnings Management: UK Evidence," M. J. Ferguson, G. S. Seow, and D. Young, Contemporary Accounting Research (Volume 21, No. 4, 2004): 813-841.

This study considers the relation between non-audit services purchase and earnings management, using a sample of UK firms and 1996–1998 data. The paper uses three proxies for earnings management: (1) the likelihood of regulatory investigation or criticism, (2) the likelihood of restatements arising from the adoption of FRS No. 12 and (3) the mean absolute value of client discretionary working capital accruals over the sample period. The paper also uses three measures of non-audit service purchase: (1) the ratio of non-audit to total audit fees, (2) the natural log of non-audit fees and (3) the decile rank of a particular client's non-audit fees relative to the all clients of a particular audit firm. With one exception, the results show that all three measures of earnings management are positively associated with the three non-audit fee measures.

Governance and Auditing: Corporate Governance in the New World Economy, Edited by Peter Moizer, (2005). Edward Elgar Publishing, Inc.: Northampton, MA.

This book includes reprints numerous academic articles related to various aspects of corporate governance. The articles are sorted into four parts, including 1) the role of auditing in the governance process, 2) audit quality and auditor reputation, 3) governance and the audit committee, and 4) the relationship between internal and external auditors. The articles are selected from top tier accounting journals and are written by many of the top researchers in auditing and governance. The book begins with an introduction by Peter Moizer, in which he discusses various topics, including, the role of auditors, choices faced by auditors, and audit quality; and summarizes the readings included later in the text. Mr. Moizer describes the book as one that "collects together some of the important research papers relating to the role that auditing plays in the governance of corporations."

Back to Contents Page